After 16 months, the cash rate won’t budge

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At its December meeting yesterday, Governor Philip Lowe and the Board of the Reserve Bank of Australia (RBA) kept the cash rate on hold at 1.5% – making December the sixteenth consecutive month the cash rate has remained on hold.

The last time Australia saw this same prolonged period of interest rate stability was back in 2013-14 when the cash rate was left on hold for 17 consecutive months.

John Flavell, CEO of Mortgage Choice, said he wasn’t surprised to see the central bank ring out the end of the calendar year with another month of rate stability.

“The latest data would suggest the Australian economy is performing relatively well at the moment and doesn’t need to be helped or hindered by a change to the cash rate,” he said. “Property price growth has stagnated across Australia, which is in line with expectations. According to Core Logic, property values across the combined capital cities fell by 0.1% over the month of November.

“At the same time, consumer sentiment took a bit of a tumble, with pessimists once again outweighing optimists. In addition, inflation is currently sitting at 1.8% [which is] slightly below the Reserve Bank’s target band range of 2-3%.

“On a positive note, business conditions hit a new high in October, according to National Australia Bank’s latest monthly business survey. Pleasingly, the strength in business conditions was quite broad based and felt across most industries. Even retail rallied throughout October.

“When you look at all of this economic data, it is clear that the Reserve Bank of Australia’s decision to leave the cash rate on hold for an extended period of time is having the desired effect on the economy.”

Nevertheless, Flavell said it was only a matter of time before the Reserve bank lifts the cash rate.

“I believe a cash rate rise is inevitable, it is now just a question of when it will happen,” he said. “The Reserve Bank may be willing to leave the cash rate untouched for some months yet. Regardless of what the Reserve Bank does or doesn’t do to the cash rate in 2018, interest rates are currently sitting at record lows and will remain lower for longer.”

According to Ben Kingsley, chair of Property Investment Professionals of Australia (PIPA), with strong economic growth forecasted for 2018 and 2019, the Reserve Bank is likely to push the cash rate higher.

One of the reasons why the cash rate hasn’t moved higher much sooner is due to anaemic income growth.

“When you don’t get strong income growth, you don’t get people who are able to spend more,” Kingsley said. “This flows into consumer confidence and spending. We have seen [that] retail spending and overall consumer spending is down, and general consumer sentiment is a little bit softer than we would like to see it.

“So this Christmas-New Year retail period, this Christmas spending period, is going to be important to see this data coming through in February and March to see whether there’s going to be any changes.”

The Reserve Bank also wants to cool Australia’s hottest housing markets.

“The macro-prudential changes being made are definitely having an effect, in terms of the demand on housing prices,” Kingsley said. “We’ve seen house prices now starting to cool and in some markets like Sydney, we’ve seen some small corrections so far. We might see further correction in the Sydney market as we move into next year."


Related Stories:
Interest Rate Hikes Coming Sooner Rather Than Later
Will The RBA’s Cash Rate Rise To 2% Next Year?

 

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